Public Bill Committee

[Nadine Dorries in the Chair]

The Committee deliberated in private.

Examination of Witness

Phillip Sykes gave evidence.

Nadine Dorries: We now hear oral evidence from R3: Association of Business Recovery Professionals. For this session we have until 2.30pm. Will the witness please introduce himself for the record?

Phillip Sykes:  Good afternoon. My name is Phillip Sykes, the vice-president of R3. R3 is the body that represents insolvency practitioners as a profession.

224 Toby Perkins (Chesterfield): First, I draw the attention of the Committee to the Register of Members’ Financial Interests, noting the interest and support previously given to my office by R3.
Not for the first time we are debating what appears to be a change in the insolvency landscape. Mr Sykes, could you take us through the provisions of the Bill around creditor meetings, financial redress and director disqualifications? Are there any aspects that, in the view of your members, will not deliver the improvements intended, but might actually have negative consequences?

Phillip Sykes:  First, I would like to say that broadly we welcome the thrust of the insolvency and company director disqualification provisions. There is some very good stuff in there, which we have been hoping for for a long time.
On creditor engagement, clauses 110 and 111 envisage doing away with physical meetings of creditors. Our view is that that is too much, too soon. That concern is shared by the Federation of Small Businesses and the British Property Federation. Creditor meetings are incredibly useful for involving the creditor community in the insolvency process. Physical meetings continue to be important. Why am I here today if physical meetings do not carry real meaning? We want to see that clause deleted because we feel that it will disengage the creditor community, in particular the small creditor community, who do not have access to broadband and do not very often engage with the insolvency process. When they do find themselves involved in an insolvency they will find themselves shut out of the process. That is the first aspect on creditor engagements.
The second aspect you referred to, financial redress, is in connection with company director disqualifications. Clause 98 is a good idea in principle but it runs into the problem of the law of unintended consequences. At the moment, 80% of all director disqualifications are through undertakings given rather than by application to court. As the idea here is that once you are disqualified the Secretary of State can apply for a compensation order, one can foresee that there will be much greater resistance to disqualification and therefore you will end up with more cases going through the courts, which will take longer and require greater resource from the Insolvency Service.
Our concern, because there will be no additional resource made available to the Insolvency Service to deal with it, is that you will end up with fewer overall disqualifications.

225 Toby Perkins: Is it your experience that the creditor meetings are quite a good way of getting creditors, who often have a lot of knowledge of the business, to help insolvency practitioners find out where the bodies are buried, lead to a better outcome in terms of recovering costs and, as a result, end up with more money available for the creditors who, through no fault of their own, have missed out?

Phillip Sykes:  That is absolutely right. That is something that I have seen regularly. People get very steamed up, quite rightly, if a company goes down when they feel there has been wrongdoing. They will make the effort to come to a meeting, voice their disquiet, and give the insolvency practitioner information on which he or she can act. My concern is that if the same creditor does not have the opportunity to go to a meeting, they will have to put it down in writing, think about it and send it off; it is not going to happen and you are going to lose that potential avenue.

226 Toby Perkins: It is a sad occasion when a business goes under. However, there are occasions when a business has gone under and it is found that it was the deliberate or negligent actions of a director that caused that business to fail and left many creditors out of pocket. In terms of the second change about the redress, do you anticipate that that will lead to fewer directors being pursued and, as a result, will there be more directors who are likely to be in a position to offend again unless creditors are getting their just deserts?

Phillip Sykes:  I think the problem would be if fewer directors were disqualified; that could be an issue. The other issue we have at the moment, which is not covered by the Bill but which the Ministry of Justice is bringing forward, is the removal of the so-called Jackson exemption for insolvency practitioners, whereby we are able to bring action against directors of that nature using a conditional fee arrangement. Some of you may have seen Mark Field’s article in CITY AM today about the issue. We are concerned that the exemption is a really powerful weapon in the insolvency practitioner’s armoury, which is potentially going to be removed. Honestly, I do not think that what is proposed here would be an adequate replacement.

227 Mark Garnier (Wyre Forest): Would you expand on that? As I understand clause 98, it is allowing courts to make compulsory orders against directors found guilty of misconduct to get financial redress. Are you saying that is not as good as the so-called Jackson exemption?

Phillip Sykes:  What I am saying is that although it is not a bad idea in principle, our concern is that clause 98 will lead to many more disqualification cases having to go to court. That will take up a lot more time and resource in the Insolvency Service. Almost certainly, as a result, you will end up with a smaller number of directors being disqualified overall.

228 Mark Garnier: But you are not worried that the clause also allows the courts to make compensation orders against directors who have been found guilty of misconduct?

Phillip Sykes:  No; we are not. The concern would be that within that there is a specific subsection that says that you can make a compensation order for the benefit of a specific class of creditors. We would have a problem with that because that offends against the pari passu principle, which is that, essentially, all classes of creditor should be treated equally. If we are going to end up with the Secretary of State making an application to say that a particular class of creditor should be treated better than others, you could end up with a bit of a free-for-all, frankly.

229 Mark Garnier: So you are saying that a director will be treated slightly differently from everybody else?

Phillip Sykes:  Well, not that the directors would be, but you could envisage, for instance, that the Secretary of State would make an application saying that everybody who had put down deposits should be specifically compensated. At the moment, as the law stands, every unsecured creditor is treated equally, and that is a fundamental tenet of English insolvency law.

230 Mark Garnier: May I turn to the other thing you mentioned, which is the removal of meetings with creditors? I completely accept all the points you made, but is there not a problem with a guarantee of these meetings that you can end up with a situation where it takes a lot more time to get these things moving along? Do you not see this as potentially a way of moving a liquidation along more quickly?

Phillip Sykes:  A section 98 meeting actually kicks off the liquidation. That is called on very short notice, between seven and 14 days. I do not think that should delay things at all, no.

231 Mark Garnier: Okay. So that is something that you feel very strongly about: you still need to have the meetings and the abolition of the meetings under clauses 110 and 111 should not happen.

Phillip Sykes:  The abolition of physical meetings will reduce creditor engagement; that is my concern.

232 Mark Garnier: May I turn to clause 106? I do not expect you to remember every detail, but it would allow insolvency practitioners to assign to a third party certain causes of action. How do you feel in general about that?

Phillip Sykes:  As you will have seen from our note, we have on the whole no major problem with it. What we do have is an issue. These are the so-called office holder actions. Essentially, if you are looking at a claim on behalf of a company, you have the claims that were there at the date of liquidation. They may be claims against the debtor or against the director for a loan account. Then you have the so-called office holder claims, which are the ones for transactions that are undervalued, wrongful trading and suchlike. Very often the information to bring those claims will have been gathered by investigation carried out by the insolvency practitioner. It may have required the use of powers under the Insolvency Act to do that. Our concern is about the logistics and how you manage the transfer of some of that information, which may be subject to some fairly clear restrictions on the use of information gathered under Insolvency Act powers.

233 Mark Garnier: Would this fall under the Data Protection Act?

Phillip Sykes:  Very possibly yes, depending on the information that has been gathered.

234 Mark Garnier: But that is a technicality. There is the general principle that these causes can be assigned. As I understand what is being proposed, the debt could be sold to somebody else, who could then go and claim it. Is that right?

Phillip Sykes:  Well, yes. But again you need to distinguish between the debt, which could be something that exists at the date of liquidation, and the claim, which may or may not be found to be a debt.

235 Mark Garnier: But it is money one way or the other. It has a value and somebody can effectively buy that.

Phillip Sykes:  There are issues around, for instance, the liability of the office holder under those circumstances. If I assign a debt or a claim to you, which you then prosecute badly and lose and get a costs order against you when you are a bit of a man of straw, I could find a costs order coming back against me, when I had nothing to do with it. There are quite a number of issues that need to be sorted.

236 Mark Garnier: You are bringing in another area of doubt. Presumably, the other question is whether these assignments could develop into quite an active secondary market as they are being moved on from one person to another until somebody eventually gets round to prosecuting it.

Phillip Sykes:  I must admit that I had not got quite as far as a secondary market in these claims. I suppose there is no reason why not.

237 Mark Garnier: It is not inconceivable. It is like a tradable debt, effectively, isn’t it?

Phillip Sykes:  Yes. I suppose I could see it ending up like that.

238 Mark Garnier: Importantly, how does it benefit those people who are victims and owed money? Victims is perhaps the wrong word.

Phillip Sykes:  There are two potential routes here. One is an outright assignment and one is an assignment where you benefit from a proportion of the proceeds. The difficulty with the outright assignment is that it is unlikely that you will realise very much for the benefit of the creditors as a whole.

239 Mark Garnier: Because it is speculative?

Phillip Sykes:  Because it is so speculative.

240 Mark Garnier: So if I take an assignment from you, I will give you maybe 10p in the pound, and whatever I get more than that is my profit, but anything I get less is my loss.

Phillip Sykes:  Yes. And If I have assigned it absolutely to you, I am probably reasonably protected from a costs claim. If I assign it to you and say we will split the proceeds 50/50, the court might turn round and say, “Well, Mr Sykes, you still had an interest in that. On the basis that you were the losing party, you should pay some of the costs on it.” I am slightly banging on, but going back to the Jackson issue, at the moment we have quite a good regime whereby you can have a conditional fee arrangement with your lawyers, so you do not have to pay anything up front to pursue these sorts of claims, and that is a weapon that is likely to be taken away from us.

241 Mark Garnier: In the case of a complete assignment at a percentage of the value of the debt, do you think creditors will have a legitimate complaint if the person who is assigned to them makes a lot of money out of it? Will that cause problems, or do you think they will simply accept that that is the way these things work?

Phillip Sykes:  I think that comes down to the insolvency practitioner. You have to make a commercial decision—is this going to be a case you can run, or is it one where, together with your legal advisers, you take the view that it is not something that is in the best interests of creditors to run?

242 Oliver Colvile (Plymouth, Sutton and Devonport): I have asked this question on a previous occasion. It concerns directors who set up companies, who then unfortunately cannot make that company work and end up going into insolvency or go bankrupt. They then go out the following day and open up another business doing exactly the same kind of thing. This may not be the appropriate Bill in which to address it, but do you have any ideas as to how one might try and deal with that issue? They continuously set up people who suddenly find themselves being owed money, and it happens on quite a regular basis. I have had one or two such cases in my constituency in the past four and a half years, and I have a great deal of sympathy for them.

Phillip Sykes:  As do we all. What you are talking about is allowing the privilege of limited liability to individuals who really should not be permitted it.

Oliver Colvile: Yes.

Phillip Sykes:  We have a lot of sympathy on that. We have looked at and have discussed with the Insolvency Service at some length the possibilities of education for directors and so on. The Insolvency Service is pretty good. Where you have a string of insolvencies, it will sit up and take notice of that. If someone is on to their fourth insolvency, they get a pretty close scrutiny as to what has been going on. That is quite a good check, but that is after the event. I think what you are asking is, how could we do something more up front?

243 Oliver Colvile: Yes. I have done commercial work, and I still have an interest in the business that I set up, although I do no work for it. I once had a client who decided to set up a special vehicle for doing a development. We achieved the planning permission that they were after, and they then said, “So sorry. We have gone into bankruptcy and we cannot actually pay you.” They make use of and continue to abuse specific vehicles to try to stop people actually earning the money. We had done all the hard work. We thought we had had a major success, to have only a piece of lemon with a bit of vinegar attached to it at the end of it, which I found particularly unhelpful.

Phillip Sykes:  Yes. You are arguably stretching into the realms of fraud, aren’t you?

Oliver Colvile: Yes.

Phillip Sykes:  But I think we all know how difficult it is to make fraud stick.

244 Oliver Colvile: Fortunately, the person who ended up buying the business ended up seeing us right, although we had to take a discount on it, but it was particularly unnerving, and it was quite large amounts of money.

Phillip Sykes:  I am afraid I do not have a panacea for that. The Insolvency Service does a pretty good job of following up repeat insolvencies, but for a one-off such as that, where someone has structured it in a rather clever, if dishonest, way, it is difficult to get your money back unless you can show through the wrongful trading provisions that it was set up with a view to taking you in the first place.

245 Oliver Colvile: Maybe you can have a think about it, and when you come up with a result I can table a private Member’s Bill on this subject.

Phillip Sykes:  I should be delighted.

Oliver Colvile: Thank you very much.

Phillip Sykes:  It is a good point, and it is the sort of thing that we would be delighted to think about. We will do that. We might come and have a chat with you, if we may.

Oliver Colvile: Excellent. I always like having chats about that.

246 Anne Marie Morris (Newton Abbot): May I ask a question about the reserve power, with regard to the single regulator? Do you think it would be a good thing to use to allow creativity, or is having tension between the existing two a good position to be in?

Phillip Sykes:  If we started today and asked how to regulate the insolvency profession, we probably would not start from where we are now. That being the case, I would draw a parallel with the accountancy bodies, for which you have the Financial Reporting Council, an oversight regulator that sits on top and has tremendous powers to call in cases and discipline the recognised professional bodies below it.
The proposal that we are particularly in favour of is giving the Insolvency Service a really strong role as an oversight regulator, with the proviso that it needs the resource to do the job properly; that is the structure we should be looking to move towards. To go to a pure, single regulator has a number of pitfalls, including—if I can put it this way—the nationalist one, because we have the Institute of Chartered Accountants of Scotland and the Chartered Accountants Ireland, and to re-fight Bannockburn over a single insolvency regulator is probably a step too far. However, I think the Insolvency Service can be a really good oversight regulator.

247 Toby Perkins: On that subject, do you see any benefit to the industry of having competition among regulators? Does it have any beneficial impacts that would be lost if the Government went down the route of having a single regulator?

Phillip Sykes:  I think there is a lot to be said for having more than one view of how regulation should take place, yes. Again, coming back to this issue, if the oversight regulator does a good, solid job, that is the way to go forward. Having said that, our survey of our insolvency practitioners shows that they strongly feel that they would like to see more homogeneity of regulation so everybody knows exactly what the playing field is.

248 Toby Perkins: Much of the Government’s approach to insolvency legislation in recent years has been about trying to reduce costs. The question is whether they can achieve that without reducing the work that is done, with the result that there is less money for creditors. Do you accept the criticism that your industry has taken too much out of it, so the Government need to stand up to you and ensure there is less money going to it? Are there any dangerous side effects to doing that?

Phillip Sykes:  The honest truth about insolvency is that whatever happens, there is not enough money to go around. If I were a creditor, I would resent every penny that has to be spent on sorting out the mess that the directors have left behind. I entirely accept that, as insolvency practitioners, we need to be doing our best to do it as inexpensively as possible. It is also important to do it as quickly as possible, because people want to see results soon, and a great result five years down the road is not worth nearly as much as a reasonable result six months down the road. We have to work harder at what we do, and we have to work harder at telling people what we do. Hence, we are very keen on more creditor engagement—we like our meetings with creditors.

249 Toby Perkins: In terms of these changes and the ones proposed in the Deregulation Bill, overall will they leave the insolvency industry in a stronger or a weaker place to act for creditors?

Phillip Sykes:  My concern is that if we bring in the complete abolition of—

Nadine Dorries: Order. I apologise, but that brings us to the end of the allotted time for this panel. On behalf of the Committee, I thank Mr Sykes for his time and for giving evidence. There are no further questions. We have to move on to the next evidence session.

Examination of Witnesses

Purnima Tanuku and Sion Humphreys gave evidence.

Purnima Tanuku:  My name is Purnima Tanuku. I am the chief executive of the National Day Nurseries Association. We are the representative body for private, voluntary and independent day nurseries across the three countries and internationally.

Sion Humphreys:  My name is Sion Humphreys. I am policy adviser for the National Association of Head Teachers. We represent school leaders, bursars and business managers across the 0-to-19 sectors, mainly in the maintained sector, but also in prep schools.
May I add, unfortunately I suffer from hearing loss and my hearing aids are not working today? I crave your indulgence if I ask for reasonable adjustment.

Nadine Dorries: We will shout, Mr Humphreys.
Mr Perkins will lead off on the questioning again.

250 Toby Perkins: Clause 64, “Exemption from requirement to register as early years provider”, concerns children in what could be a school setting from the age of two. Will you both explain whether you welcome the move and whether we should consider anything that might be a detrimental consequence of the move?

Purnima Tanuku:  We strongly object to clause 64. We very much feel that the well-being and safety of children, especially in early years, is the most important and fundamental issue that we need to be looking for. The regulation must follow the child, funding must follow the child and the curriculum must follow the child, and parents should have a choice of setting.
Irrespective of that, in terms of regulation and inspection, we are concerned that the clause will take away the responsibility for two-year-olds, in schools especially. The inspection will be light-touch, perhaps with a paragraph in the report of the whole primary school inspection, which will be focusing on much wider issues, whereas in a private day nursery or a voluntary sector nursery, the inspection is a full process, with a full report and a grading submitted. We feel that this creates a two-tier system and unfair disadvantage to the private and voluntary providers, putting schools at an advantage under the inspection regime. We are strongly opposed to the clause and want it removed from the Bill.

Sion Humphreys:  We probably welcome some of the changes, because of the continuity it can provide for the educational career of children moving from one institution to another. We have some reservations about the Ofsted proposals and whether there can be a catch-all situation. We are looking at the current consultation on that with considerable interest. We recognise that there are those problems. There are problems for the schools in terms of change in accommodation and so on as well, but overall we broadly welcome the opportunities that the measure can provide, notwithstanding some of the clear logistic issues involved.

251 Toby Perkins: Would you see the provision of the schools from the age of two as being consistent with the way in which they provide services at other ages, or might there be an extent to which the specialism of early years providers will be lost if it all goes into the school environment?

Sion Humphreys:  It is important that the adults who are working with children at specific phases are trained, skilled and experienced in those phases. We would be concerned if, for example, there was a dilution—if early years were seen as one homogeneous mass and we lost that differentiation. In the broader context of the changes proposed for the early years work force—qualifications and preparation, and some of the broader assessment changes that are coming—I suppose we are working back down from the proposal of having a reception baseline and implications that might have for the early years foundation. We see advantages there. We would not see it as being all one way—that the schools are the experts and would therefore be imposing those views on colleagues working with younger children—but that it would be a two-way process.

252 Toby Perkins: Ms Tanuku, you said that the provision would create a two-tier system. Would you expand on what the difference would be and, particularly, what the impact of that difference might be on children and parents?

Purnima Tanuku:  There are two issues. There is an assumption that all school-based provision is better quality than the PVI sector. That is something that we need to address. The latest Ofsted figures say that 78% of primary schools are good and outstanding, whereas 84% of the private, voluntary and independent day nurseries are good and outstanding. There is no rationale that schools are the only places that can provide high quality in early years, without equal scrutiny by Ofsted and the consistency of Ofsted inspecting early years. Primary school teachers are not all qualified to look after early years children. We are asking for early years to be inspected by early years specialists, as happens in the PVI sector. That inspection should be robust, equal to other settings, irrespective of where the child goes. We cannot afford to have a one-paragraph Ofsted report as part of a wider inspection and take it for granted.
The other thing that concerns us is the latest announcement by Ofsted that school-based early years settings will not be inspected for 30 months after they have been set up. That is nearly two and a half years without an Ofsted inspection. I do not think that we can afford to put children in such a risky situation—a setting that will not be inspected for 30 months after it opens. There are some real concerns about that.

253 Anne Marie Morris: May I turn to clauses 66 to 69, about information sharing? The question is probably principally for you, Sion. There are quite a number of suggestions about how information might be shared. First, there is information sharing between the Government and educational institutions. Do you have any concerns that that will create a significant administrative burden?

Sion Humphreys:  Could you repeat the question a bit louder, please?

254 Anne Marie Morris: In the Bill, there is new provision for data sharing between the Government and educational institutions. Do you have any concerns that that will impose an excessive, additional administrative burden on schools?

Sion Humphreys:  Yes, we do. There was a proposal for the data warehouse. It is not bureaucratic pressures and workload per se, but whether the benefits that will be derived from that are consistent with the amount of effort put in—the investment in time. There has been a little bit of backtracking away from that, partly due to logistic reasons and partly due to the fact that schools are very keen to share data that they feel gives the full and rounded picture of their institution to parents in particular.

255 Anne Marie Morris: So, in summary, it is generally favourable, provided it is done in a sensible way.

Sion Humphreys:  Yes, if it is information that is going to be useful for parents holding the school to account. We welcome anything that does that in a constructive way.

256 Anne Marie Morris: Do you have any concerns about confidentiality or where that data might go?

Sion Humphreys:  Ofsted’s proposals are that the data should be in aggregate form and not traceable back to individuals. We would want that safeguard to be paramount in any moving forward.

257 Anne Marie Morris: I think you have effectively already said that the most beneficial part of this is sharing data in a neutralised way with parents and families. What do you see as the real benefits, and can you give me examples of how you think this could be done most effectively?

Sion Humphreys:  An example would be parents looking at the academic offer of a school, its academic record and so on, but also looking for other, less easy to quantify things: the culture, ethos and so on. A school might have a particularly strong tradition in the performing arts and a parent might want a particular mix of curricular emphasis on and excellence in that. It is the ability for parents to make more informed judgments as consumers—I hate that word, but it conveys the concept.

258 Anne Marie Morris: How do you think we can get parents to understand the value of the data and how best to use it to make those decisions, looking at the employment pathways and education options that previous students have taken? Parents need to be able to use the data, or it becomes redundant.

Sion Humphreys:  That places a responsibility—I deliberately did not use the word “burden”—on school leaders in their important interface with parents, which in secondary schools is happening around this time of year with a footfall through schools and parents expressing their preferences for next year. They must have a choice to express a preference.
We feel that sometimes the balance between the input from the school and what parents are asking is out of kilter. We have started to work with parents’ organisations—for example, Family Action—to try to see how we can improve the quality of that important dialogue.

259 Andrew Griffiths (Burton): Ms Tanuku, may I ask you about the Ofsted appeals process? I have had personal experience of nurseries in my constituency that have been frustrated with the Ofsted appeals process. They feel that their voice is not heard when Ofsted judgments have gone against them, and that it does not work to support independent nursery providers. Do you have a view about the Bill and how it will help, particularly in relation to the small business appeals champion?

Purnima Tanuku:  You are absolutely right. Recently, during the past 12 months, there has been a surge of complaint-driven inspections that caused a huge issue for early years settings. A poor or bad Ofsted judgment can have a detrimental impact on a nursery. If that judgment relates to child protection issues, or child welfare or safety issues, Ofsted should absolutely come down like a tonne of bricks and inspect it rigorously, but when it is a minor incident and the setting and the process of the inspection is not robust enough, at the moment the providers do not have any way of challenging that process. Ofsted has an appeal process, but it is done by its own in-house inspectors and the last resort for providers is a legal challenge. A legal challenge and judicial review cost around £30,000. I know providers who could not afford to sit with a judgment on their back and have gone to judicial review, but even then the judge could not overturn the judgment.

260 Andrew Griffiths: Do you think that has caused private providers to go under?

Purnima Tanuku:  Absolutely, it has. We have a legal helpline and we receive calls from providers regularly when they have been outstanding at one moment and after an inspection, following a complaint or whatever, they have been downgraded. That has a real impact on their business.
We welcome the Bill’s introduction in part 2 of the small business appeals champion, but that champion needs to have a lot more powers to challenge and make Ofsted accountable for its judgments. That part is missing. Without that, having a champion and a list of those appeals does not take it far enough. What needs to happen is that the powers of the review should be extended, not only to review the complaints and appeals process of regulators but to scrutinise and overturn in cases where the inspection process has not been robust. Only then will the providers have the comfort that these complaints are going to be looked at by an independent reviewer through the appeal process. It is important that we have that.

261 Andrew Griffiths: Do you have any idea of the scale of magnitude that we might be looking at? Do you have an idea of how many nurseries in a year may want to take this kind of case against Ofsted?

Purnima Tanuku:  Judging by the previous 12 months or so there would have been thousands of nurseries that would have done that. Ofsted also agreed to have paid-for inspections. If a setting wants to improve its quality and pay for inspection that is now legally possible, but we still have not heard from Ofsted when and how that system is going to work, or how much it might cost. In some cases, nurseries are waiting four to five years for an inspection. In other cases, settings are sitting on that judgment until they get re-inspected. In the meantime they do not have a procedure to appeal and have the judgment overturned.

262 Andrew Griffiths: Four to five years is a period when a business can easily go under.

Purnima Tanuku:  Absolutely.

263 Andrew Griffiths: In an ideal world, how quickly do you think these appeals should take place? Finally, will having this appeal process with the small business champion help to drive up the quality of the Ofsted assessments?

Purnima Tanuku:  I think you are absolutely right on both. It should drive up the quality in terms of the inspection process and its robustness. Equally, from a provider point of view, if they want to improve their quality and grade as they do, they have a mechanism. If they feel that they have not been inspected properly they have a mechanism through this process to appeal. But, as I said, the appeal process on its own is not enough. I think that champion needs to have powers to make Ofsted accountable, to scrutinise and to overturn judgments if that needs to happen.

Nadine Dorries: If there are no further questions, I would like to thank the witnesses for their time giving evidence today. We will now move on to the next session.

Examination of Witnesses

The right hon. Matthew Hancock MP and Andrea Leadsom MP gave evidence.

Nadine Dorries: Minister, are you happy to address the meeting, as you are the only Minister here at the moment?

Matthew Hancock:  Yes, of course I can answer questions on any sections of the Bill. If anyone has specific questions on the Treasury issues, although I can answer questions on that, we could put them at the back end and then Andrea will be here.

Nadine Dorries: Of course. I suppose this is going to be more of a grilling now, rather than a hearing of oral evidence. Mr Perkins will again lead off the questioning.

265 Toby Perkins: Successive Governments have wrestled with late payments over many years. Since 1998, businesses have had the opportunity to charge interest. There has since been the prompt payment code and the EU late payment directive. But as we heard in evidence on Tuesday, late payment continues to get worse, and the amount of money owed is higher than it has ever been. How significant a problem is late payment, particularly for small businesses but for the UK economy more generally? If, like our witnesses on Tuesday, you consider late payment to be a significant problem, do you think the steps proposed in the Bill will be a step change, or will they be a small step in the right direction?

Nadine Dorries: I am sorry, Minister, but could you please introduce yourself for the record?

Matthew Hancock:  I am Matthew Hancock, and I am the Minister with responsibility for business, enterprise and energy. I do think that late payment is a problem. As you say, steps have been taken over many years to try to strengthen the regime on late payment. The Bill makes important changes, and we can go through those changes if you like. Ultimately, the fundamental purpose of the Bill is to try to bring the legal structure behind late payment to the best possible position. We are addressing two different areas of the big picture. The first is late payment in entirely private contracts between two private companies, and the second is late payment in the public procurement chain—not only high-level, initial procurement but procurement down the value chain.
The figures that you quoted were also quoted in the evidence session on Tuesday. The increase in measured late payment from £30 billion to £39 billion reflects, in part, a change in methodology to broaden the late payments that are captured in the figure. The two figures are not directly comparable, so we do not have a figure for how much late payment has changed over the past couple of years. We do not know how much of the £9 billion increase is because the statistics cast the net wider and how much is because of increased late payment. Nevertheless, that does not take away from the fundamental point, which is that action needs to be taken.
We have two sets of measures: one is to improve late payment in entirely private contracts, and the second is to improve late payments in public procurement. A series of steps are already taking place in public procurement, not least the need to have 30-day terms cascading all the way down the supply chain from central Government. That is now on track. At the top end, Departments across Government are now paying much faster than they were. In the Business Department we pay 98% of invoices within 30 days, and we are paying 95% of uncontested invoices within five days, so that has improved significantly. We have now introduced measures to cascade that down the value chain. We have also taken a broader power. Clause 33 is cast broadly to improve public procurement, including the speed of the processes. We have launched a consultation on how the statutory instruments that underpin clause 33 will be drafted to take that into account.
On purely private contracts, we put out a consultation that essentially had all the options on the table. There is a very real tension between the need to preserve a contract law—it is highly respected and used not only here, but is a strength to the UK and is used around the world—that allows for contracts to be negotiated directly between two companies, and not interfere with that, and, on the other hand, the intention to ensure that prompt payment occurs. It is that essential balance that you have to strike correctly to decide whether to bring in, for instance, a statutory maximum, which was part of the discussion on Monday.

266 Toby Perkins: I agree with that, and I would argue that the Bill probably does not strike the right balance. I accept entirely what you say about public sector late payments, but the evidence we had from the FSB and others suggests that that has been significantly improved over six or seven years, and I would absolutely support any further steps we can take to make sure that that cascades down, because 20% of insolvencies—2,500 businesses a year—are caused not by companies trading unsuccessfully, but because of late payment. The extent to which some major businesses effectively utilise their supplier base as though it is an unofficial credit line and the fact that there is not fairness in that relationship means that, as many of us would argue, more significant steps need to be taken.
Returning to the issue of private sector late payment, what we have in the Bill are steps towards greater transparency. We have not got anything to redress the balance. Do you think that that will be adequate, or do you believe, as I do, that in another year or two we will be sitting here having exactly the same discussions, perhaps with suppliers a little better informed as to what they are letting themselves in for before they start supplying the customer, but with that basic unfairness remaining unchanged?

Matthew Hancock:  This is not intended to be the silver bullet on its own, not least because we are taking a series of other measures at the same time. Strengthening the prompt payment code is very important, and that will occur at the same time as this. As I said, transposing the European directive is happening at the same time. So this is part of a package of measures to improve this. When it comes to the statistics on how many people this affects very severely, I understand that, and it is not only statistics; it is real-life experience. It had a very big impact on my family business, which I am no longer involved in, but was in the past, so this is personal for me.
In the evidence on Tuesday there was a clear divide between the different organisations. The Institute of Directors and the CBI clearly did not want to put the code on a statutory footing. The call to outlaw the retrospective adjustment of contract terms is very tricky, because that is already the case in law. If you have a contract, you have to pay by that contract, and if you do damage by not paying on that contract, there is recourse under the law. The problem is that the power relationship between the supplier and the purchaser means that that is often not taken up. So bringing in in statute, as opposed to in tort, essentially the same power, I cannot see making much difference. What matters is how people exercise the power in law that is already there. The ideas around how you make it easier for suppliers, especially small suppliers, to take up the powers that already exist in law are important.
Similarly, the FSB says that it is in favour of a statutory maximum such as 60 days, except for where it is agreed by both parties not to have that. That is essentially the position that we have in law, because if we make a contract, the contract sets the terms, and the proposal to have a maximum unless it is written in the contract is essentially reiterating that the contract is followed.
The nexus between what we can change through law and what we can change through non-statutory action is heavily intertwined. There is undoubtedly more that we can do, but we have to beware of false prophets in the area, with people saying, “This is a panacea” or “This is a silver bullet.” My goal is to do as much as we possibly can that will be effective.

267 Toby Perkins: And you think that this does as much as it possibly can.

Matthew Hancock:  This takes major steps forward in law. Some of the other proposals that have been put forward would reiterate existing law, whereas what is needed is execution of those legal rights.

268 Toby Perkins: Turning to the pubs code, we are interested in how you perceive the “no worse off” option being utilised, in particular by new entrants to the industry. How would you see them coming in? They have read the brochure and met the guy who has told them what it will be like when they run a pub; how would you see a new entrant to the industry utilising the “no worse off” option? How successful do you expect it to be?

Matthew Hancock:  I think it is important, and I hope that it will serve this purpose: when you go to take over a tenancy, which I have not done, although I know that members of the Committee have, the principle behind the tie and the beer being cheaper is that you get a lower rent, and therefore you improve your risk relationship, because you move some of your costs away from being overhead and on to being costs on the margin. In theory, that is a sensible contractual decision for someone to make. The rationale behind it is straightforward. What I hope that the proposal will do is to make it easier for people to make that assessment, so that we can be more confident that that assessment can be made on a fair and balanced footing and people can make the judgment as to how much they are losing off their overheads in order to be having to pay more for their beer.

269 Toby Perkins: You are right as far as it goes. Obviously, the pub companies would say, “There are lots of other benefits that you get from being with us. We do training, we have got this great buy price and we have got all these various benefits that you get from being tied to us,” but it rather prompts the question, does it not, if the deal is so great, what have the pub companies got to be frightened of if they offer people the opportunity to go free of the tie? Surely if they are offering that great deal, with their buying power, training and all those things that they give to a new tenant that a new tenant would not get down at the wholesaler, why would the tenant not stick with them anyway?

Matthew Hancock:  They make two perfectly reasonable points, one of which is a principled and one a pragmatic one. The point of principle is that the pub companies own the pubs. That is a principle of property rights. We have to be very, very cautious about breaking that, because the principle of owning something until you choose to sell it is an incredibly strong one. We would be undermining that, so that is a point of principle that makes me want to act carefully in this area—of course, as a Minister, I want to act carefully in all areas, but it merits caution.
The second point is a practical one, which is that I want lots of successful pubs. I live in a constituency that is littered with tied Greene King pubs—the Greene King brewery is about two miles away from my constituency boundary—so I understand this very well from first-hand constituency experience. Whether we like them or not, we need to listen to the big pub companies when they say that something like this, if it did not work well, could lead to the closure of lots of pubs. The BIS analysis was well grounded when it came up with the figure of how many pubs would close. That is a second piece of evidence that suggests that we should be very cautious before we go further.

Nadine Dorries: Order. Eight Members are waiting to speak and you have had well over 15 minutes, Mr Perkins. Let us move along swiftly so that other Members can have a go.

Toby Perkins: May I ask my final question?

Nadine Dorries: If you keep it short and there is a short response.

270 Toby Perkins: Thank you very much.
I was going to say that the truth of the matter is that huge numbers of pub company pubs have closed, and a huge amount of their stock is being sold off to Tesco and various other places. There is obvious evidence that the model is under stress. As a Minister, you will be conscious that we want the very best for our economy and our communities. Pubs remain open in the most successful environments; it is the best thing for them. If the fantastic deal that they have all been going on about is sufficiently vulnerable that if people had any alternative, they would go and choose it, that does rather undermine the idea that the pub companies are offering a great deal for their tenants, does it not?

Matthew Hancock:  By pushing that argument, you are leading us to sit in judgment on the likely commercial future of the pub industry. Your point is that lots of people are moving out of the tied model and pubcos are selling off tied pubs, but it is for them to do so. Enacting legislation that requires them to remove ties would go much further than that, and I do not see how it would alter the argument.

271 Mark Garnier: Mr Hancock, how long have zero-hours contracts been in existence?

Matthew Hancock:  I do not know—I am probably not supposed to say that I do not know. A long time, is the best answer.

272 Mark Garnier: Ten years, 20 years—that sort of thing?

Matthew Hancock:  They have certainly been in existence for 10 years. They have been in existence for a long time. A less formal way to answer the question is to say that they have probably been in existence for as long as there have been employment contracts, although I do not have any specific evidence of that.

273 Mark Garnier: That is fine. I just wanted to get a rough idea. All I really wanted to know is how much analysis has been done by the Government and your Department into the issue of zero-hours contracts.

Matthew Hancock:  When I became a Minister in BIS in 2012, I was not aware of any analysis or work that had been done on that subject before a couple of years before I arrived—before 2010.

274 Mark Garnier: So they could have been around since the Victorian workhouses, as the representative of one of the unions said the other day, and no analysis was done of them before 2010.

Matthew Hancock:  We are proud that we are bringing forward the first piece of work on this issue. Tackling exclusivity in zero-hours contracts is something that we are proud of doing, and it is something that the previous Government did not do.

275 Mark Garnier: So no analysis was done before 2010?

Matthew Hancock:  No work that I am aware of.

276 Mark Garnier: Fantastic. Thank you very much. I want to look at some of the analysis that has been done, because there are some remarkably wide-ranging estimates of how many zero-hours contracts there are. We heard from the Office for National Statistics that there are 655,000; the Chartered Institute of Personnel and Development said that there are 1.25 million; the representative of the GMB did a quick analysis, which could be very fair, of the ONS figures and came up with a number of 1.2 million; and we had the Unite figure of 5 million. Why is there so much discrepancy and variation, and do you think that there are some figures that we could trust?

Matthew Hancock:  I think the best figures—I would say this, wouldn’t I?—are from the ONS. They are the official statisticians. There are two ONS figures. The latest figures give an estimate of 622,000 people on zero-hours contracts, which is less than 2% of the labour market. The ONS also estimates that there are 1.4 million non-guaranteed-hours contracts, which is about 5% of contracts. That is the number of contracts, not people. Some of the muddle around the statistics in this area is about whether you are counting people or contracts, because many people on zero-hours contracts have more than one contract. That is why exclusivity is so important and is precisely the point behind the legislation. We heard some wilder figures but then heard that some of the analysis behind it was because the question had been, “Do you know anyone who is on a zero-hours contract?” I would rather trust the ONS figures.

277 Mark Garnier: Okay. Let us be clear on this: there are 1.2 million non-guaranteed-hours contracts—

Matthew Hancock:  There are 1.4 million non-guaranteed-hours contracts and 622,000 people on them.

278 Mark Garnier: Fantastic. I think we are pretty clear on that. There have been worries from some of the witnesses that one or two people might start gaming these zero-hours contracts. They might say, “We’ll give you a notional 12 hours a year, so it’s therefore no longer a zero-hours contract.” How will the Government respond to that?

Matthew Hancock:  We plan to deal with that by ensuring that near-zero-hours contracts are taken into account in the way the legislation is implemented, precisely to address the point you raised. It is very important for enforcement purposes that you cannot have a near-zero-hours contract which cannot be enforced against, where the intention behind it is to continue practices that are essentially zero-hours contracts.

279 Mark Garnier: There will clearly be a lot of debate about what is near and what is not near. How will you gather evidence in order to decide what is a near-zero-hour number?

Matthew Hancock:  We want to get the details of that exactly right. There is a lot of work to do to ensure we get the precise primary and, crucially, secondary legislation right about that. There will no doubt be a bit of debate about that.

280 Mark Garnier: There were one or two rather helpful comments from the CIPD. One of those was about wasted journey compensation for people who have come in to a company to try to get a job and then discovered there is not one, meaning they have had a wasted journey. There will be a few things coming up like that; are the Government receptive to that type of constructive observation?

Matthew Hancock:  Can you be more precise?

Mark Garnier: The wasted journey compensation, by way of example.

Matthew Hancock:  I see. We are consulting—the consultation closes on 3 November—on exactly how to prevent unscrupulous employers circumventing the Bill’s exclusivity ban through simple avoidance techniques such as that, as well as the consequences of wider unscrupulous activities that go against the spirit of what has been set out thus far.

281 Mr Iain Wright (Hartlepool): Minister, I was interested in your comments about the power relationship between contractors and suppliers. Do you think there is a limit to statutory powers? Can anything more be done in this Bill? I was particularly concerned—Oliver Colvile also said this on Tuesday—that a small business might be frightened to raise anything if it derives a substantial part of its total turnover from a single contractor and has, for example, a 120-day contract. Does the Bill help that sort of example?

Matthew Hancock:  Yes it does—absolutely. Maybe I should have included this in my answer to Toby: the transparency arrangements in this are all about trying to change the culture, and I think they will have a big impact. The public procurement will have an impact on the culture because we hope to make 30 days the norm, and the transparency arrangements will change the culture. They will also allow people to know when they enter into a contract what sort of people they are dealing with. That is very important.
We are practical people. A bit like zero-hours contracts, late payment has probably been around since contracts have been. What we have to do is get to the best possible position and in that, corporate cultural behaviour is important. In fact, we heard a lot about that from witnesses, including the description of how corporate treasuries stopped other people within the payer who wanted to be good payers from being so, in order to manage cash flow. That sort of activity will be undermined by the transparency that we are bringing about in this Bill.

282 Mr Wright: Andrea, do you see a direct correlation between the rise in recent years of zero-hours contracts and Treasuries failing to hit the income tax target? Do you, as a Treasury Minister, want to see a reduction in zero-hours contracts because that will provide the Treasury and public finances with greater predictability in terms of income tax forecasts?

Andrea Leadsom:  Thank you—you woke me up there. First of all I would like to apologise: my office was told that I should have been here at 3 o’clock. I gather you started early, but I wanted to put on the record my apologies for being late. However, I absolve myself of any guilt.

Nadine Dorries: Minister, can you please introduce yourself for the record?

Andrea Leadsom:  Of course. I am Andrea Leadsom, Economic Secretary to the Treasury.
In answer to the question, of course the Treasury is always keen to see increased tax revenues, but, equally and even more importantly, it is very keen to see more people in decently paid jobs. That has been the focus of this Government right from 2010. Of course, there will be a correlation: if we see a reduction in zero-hours contracts and people are employed on better contracts where they have regular hours, we expect we will see a change in the Exchequer’s share of employment taxes, so that is a good thinig all round. But essentially, we want to see more people in employment.

Sheryll Murray: It is a pleasure to be here under your chairmanship, Ms Dorries.
Mr Hancock, this Government have implemented a system of deregulation over the course of the Parliament and we already have a regulatory target of one in, two out as part of our policy. Why is that target not in the Bill—why are you allowing it to be set in secondary legislation?

Matthew Hancock:  We think that our one in, two out target has been very successful. We are on track to meet it. It has changed the culture in Whitehall, because if any Department wants to bring in any new piece of regulation for whatever reasons—and there may be good public policy reasons to do so—it has to have outs. That means there are now officials squirrelling away in all sorts of different Departments looking for regulatory outs and looking to ease the burden on business of their Department. That was not the case before, and it has been largely driven by one in, two out.
Nevertheless, you can always improve the way that a regulatory target works. For instance, the precise measurement of what counts as an out, and how you make that measurement, are important. If we make an improvement to the process of measuring the burden on business, we want to be able to change that in a relatively straightforward manner.
The Bill ensures that the Government are required to set a target at the start of each Parliament. I think that any Government who set a target of increasing the burden of regulation would find it very difficult to answer to why that was a good idea. Anybody who moved off the one in, two out approach would have to explain themselves. So there is quite a lot of strength behind the transparency required by the Bill, but it also allows the flexibility to be able to improve the way that the target operates.

283 Sheryll Murray: May I turn briefly to zero-hours contracts? Some of the witnesses on Tuesday gave us the impression that they are bad contracts, but I have a lot of tourist businesses in my constituency, as well as a lot of young mothers, and they welcome the flexibility of a zero-hours contract. Is there any evidence to show how many people are unhappy with their zero-hours contracts compared with the number—possibly the silent majority—who are quite content with them? I do not necessarily agree that a different contract of employment with a guaranteed number of hours is a better contract. It depends on the individual.

Matthew Hancock:  There is evidence that the proportion of people who would like to work more hours than they do has fallen at the same time as the increase in employment, which shows that the increase in employment is not people taking low-hours jobs. Of course, some people will have done, but on average it has been accompanied by more security for those in work at the same time.
On the broader point, there are people for whom a zero-hours contract is an appropriate contract, for both the employer and employee. I thought that the strongest testimony on Tuesday was from the TUC, which argued that it employed people on zero-hours contracts and has done for many years, and that it is successful because it is a scrupulous employer, which I do not doubt. Lots of local councils under the leadership of all political parties use zero-hours contracts. That is why a broad consensus has formed in support of the principle of zero-hours contracts being available, but also in support of abuse being tackled. Exclusivity is the single biggest and most unjustifiable abuse, and I am proud to say that we are tackling it.

284 Ian Murray (Edinburgh South): Does the Minister think zero-hours contracts are a problem?

Matthew Hancock:  I have just answered a very similar question. There are zero-hours contracts that are a problem, and they are abused. Exclusivity clauses are unjustified, which is why we are putting a stop to them. Nevertheless, there are some zero-hours contracts where it works for both sides and they are appropriate.

285 Ian Murray: Although the Bill deals with exclusivity, it does not cover other issues relating to zero-hours contracts. For example, does the Minister think it fair that someone who has been on a zero-hours contract for three years working 40 hours a week could go off on sick leave but not get any sick pay? Is that a good or bad aspect of zero-hours contracts?

Matthew Hancock:  Of course, if you are covered by an employment contract at all, you have the rights of those who are on such contracts. Again, there are examples of people who have been on zero-hours contracts for a long time and it works for both sides.

286 Ian Murray: In terms of the provisions in the Bill, what happens if someone ends up with an exclusivity clause in a zero-hours contract—how is that enforced?

Matthew Hancock:  The exclusivity is not legally enforceable. We had the debate with some of the witnesses about whether there should be redress. There is a reason why redress is not in the Bill: a zero-hours contract with an exclusivity clause is not recognised as such, it is recognised simply as a zero-hours contract. An exclusivity clause is null and void and therefore cannot be implemented. There is therefore no loss to redress against. That is the legal description, but let me put it in plain English: if your boss tells you that you cannot go and work somewhere else and they are going to enforce against that, you can go and work somewhere else and they cannot stop you.

287 Ian Murray: But you lose your job. How do you enforce against the loss of your job in the example you have given?

Matthew Hancock:  In the same way that you enforce against any loss of job if it is not done properly.

288 Ian Murray: In what way?

Matthew Hancock:  Employment law applies in order to ensure that if people lose their job in an inappropriate way, there is redress against that.

289 Ian Murray: Why is that not included in the Bill? Why would you not specifically put that in the Bill, that you could enforce the exclusivity contract provision through the appropriate employment regulation?

Matthew Hancock:  This is an important point—because a zero-hours contract is a contract of employment, and therefore is dealt with in all the legislation around contracts of employment.

290 Ian Murray: So, if you have worked for an employer on a zero-hours contract for 40 hours a week for 23 months and three weeks, and they insist you cannot work for someone else, and therefore if you work for someone else you are sacked, how do you enforce your employment rights?

Matthew Hancock:  If you work for somebody for less than two years, and they want to end that employment contract, then the normal rules around tribunals apply. And we have extended the time period after which you can go to tribunal, from one to two years, as part of trying to ensure that we encourage companies to employ people, and that has been pretty successful.

291 Ian Murray: In that hypothetical example I have given you, an employer can break the law under the terms of this Bill as it is written, and there is no way of enforcing it because you have been in employment for less than 24 months. Is that correct?

Matthew Hancock:  No, the situation would be no different whether you are on a zero-hours contract or a stated-hours contract, so it is not an issue—

292 Ian Murray: I do not want to labour this, but I suppose the comparison that I am giving is if someone loses their job on the basis of non-performance, or indeed on the basis of any other issue, and they have worked for an employer for less than two years, for the qualification period, they have no way of enforcing that, because in fact they may just have been told they are surplus to requirements, or indeed they could have committed some offence in breach of their own contract. I suppose the issue here is that if an employer breaks the law under the terms of this Bill, there is no way for them to then be able to fulfil employment rights through the appropriate channels. Is that correct?

Matthew Hancock:  The Bill does not change the way that the redress in that circumstance—

293 Ian Murray: So, in that circumstance, the employer has broken the law but there is no way of dealing with it?

Matthew Hancock:  No—I do not think that is an appropriate reading of the situation.

294 Ian Murray: I have two very quick questions. The non-payment of compulsory awards at an employment tribunal is now satisfied by a fine, which I think is a good step forward. Indeed, your predecessor—the Minister of State, Department of Health, the right hon. Member for North Norfolk (Norman Lamb)—said during the passage of the Enterprise and Regulatory Reform Act 2013 that he would bring something forward to try to impose a fine. Do you think that any moneys that come in from that particular employer should be paid to the employee first, before the fine has been satisfied, in order that the Government can enforce the 40% or so of awards that are no longer paid?

Matthew Hancock:  As you say, the Bill strengthens the ability for anybody to enforce against tribunals. Too many tribunal awards are not enforced against and the Bill will tackle that, so it is undoubtedly a good thing.

295 Ian Murray: Is there a danger the Government could be paid the fine and the compensatory award could remain outstanding, and what is the process in the Bill for continuing to pursue that?

Matthew Hancock:  Fines from the Government can, of course, be chased down by the Government. A whole series of measures already exists to allow the Government to ensure that fines are paid. What the Bill does is ensure that that applies in this case as well.

296 Ian Murray: I suppose the question I am trying to ask is this: if you do not pay my compensatory award, and you—as the Government—fine me as an employer £5,000 for not paying that compensatory award, if I then pay the Treasury the £5,000, what is the mechanism for pursuing the compensatory award that has still not been paid?

Matthew Hancock:  Then you would still not have paid the fine that was due, and so—

297 Ian Murray: You have paid the fine, but you have not paid the award.

Matthew Hancock:  Then you still have not satisfied the tribunal.

298 Ian Murray: So what happens?

Matthew Hancock:  You continue not to have satisfied the tribunal, so they take action.

299 Ian Murray: What happens if you are fined again and then you pay the Government but do not pay the compensatory award?

Matthew Hancock:  This is pretty unlikely, because the threat of being repeatedly fined would outweigh not paying the award. Of course, you would continue to be without the decision of the tribunal.

300 Ian Murray: I am pursuing these questions because the wording in the Bill means that the Treasury can rack up considerable revenue from fines, but the poor person who is not being paid the compensatory award will remain without that. Have you given any consideration to there being a balancing in the allocation of moneys coming in to both the fine and the compensatory award until the fine is fully paid? That would provide a proper balance, with the person who was proved to have been wronged in a court of law getting their money as well as the Treasury, rather than the employer satisfying only the debt of the Treasury and forgetting about the person who should have been compensated for loss of earnings.

Nadine Dorries: Could that be your final point, Mr Murray, unless you want to add anything to that? We still have seven more Members with questions to ask.

Matthew Hancock:  I am sure that we will consider that during the passage of the Bill.

301 Stephen Gilbert (St Austell and Newquay): Minister, we heard earlier today from the British Beer and Pub Association, Fair Pint, the Campaign for Real Ale and others that they see a big difference between pubcos with more than 500 premises and those with fewer than 500. However, the Bill does not really reflect the differences that they saw in a consensual way—why not?

Matthew Hancock:  First, as you are the Member for St Austell Brewery, I am not surprised that you asked this question, because they are often held up as the exemplar of a small, high quality pub company. There is a clear distinction between what is required of those with fewer than 500 tied pubs and those with more than that, which reflects the fact that, if you are smaller, first, the burdens are proportionately greater and, secondly, in almost all cases, the smaller chains are not where the problems are.

302 Stephen Gilbert: The only difference appears to be the parallel rent assessment that is in the enhanced code and not the core code, which will apply only to the bigger ones. If you talk to family brewers such as St Austell Brewery, they will say that the burdens of recording conversations, the temporary closure regime and the need to involve highly paid chartered surveyors in making some assessments will put a disproportionate burden on them and, as you just said, they are not the problem.

Matthew Hancock:  I heard that evidence and I thought that it was strongly put. Some reassurances are important; for instance, on having a compliance officer, it is important to be clear that that does not need to be a new employee, in the same way that the company secretary in a small business is rarely a separate employee; they often do that as well as many other things. Essentially, someone will be nominated as a compliance officer, but that does not need to be a separate person. The policy goal behind the provision that applies to pubcos with fewer than 500 tied pubs is that, if you run your chain well, essentially you should not be affected, and you should be supported in what you are doing.

303 Stephen Gilbert: Do the Government think that there is scope for looking at the provisions in the enhanced code to ensure that some of the measures proposed would not put a disproportionate burden on those chains of under 500?

Matthew Hancock:  We think that the principle here is to tackle the evidence of problems in large pub companies, while reflecting the evidence that the small pub companies have far fewer, and in many cases no problems with their tenants. There have been some instances but the number is pretty small. At the same time, of course, if you are moving away from having the non-statutory code, you have got to consider the impact of moving the big six on to a statutory code.

304 Andrew Griffiths: I briefly want to cover two things. First, may I talk about cheque imaging, which I think is a fantastic part of this Bill? I have spoken to small businesses and charities in my constituency who are over the moon that no longer will they have to wait, go to their bank and take cheques when they arrive. They will be able to sit at their desk or use their mobile phone, scan in their cheques, thus saving travel, time, money and effort. How quickly can we push this through? What is the concern that some within the financial services and banking industry might try to delay this? This is a key thing for saving money for small businesses and charities.

Andrea Leadsom:  I completely agree with you that this is a superb amendment to the Bill. We are delighted that the banks have agreed to give their best efforts to bring this in as soon as possible. We have called for it within two years. I have actually recently written to the banks saying, “Why don’t you go for a year, guys?” Nevertheless, we are sticking with two.
It is not completely easy. There are issues of somebody who has sent in an electronic image and at the same moment runs into the branch and tries to pay in the paper version. There are some issues around avoiding double presentation, as you can imagine. There are all sorts of systems issues that need to be resolved, but we are extremely keen.
There is no doubt there is a high level of commitment to this from the industry. It is very important, too, that, just because you are able to send in an image of your cheque instead of the paper copy, it does not stop you if you prefer, for any reason best known to yourself, to take your cheque into your branch in paper form. You are still absolutely entitled to do so. A key requirement of the Bill is that, if you take it in paper form or in image form, the time taken to clear the cheque should not be different. It is going to speed up the whole clearing system for cheques. It is a superb innovation.

305 Andrew Griffiths: The idea that we can bring down the cost of clearing a cheque from £1 to 25p will be a fantastic boost for everybody. How important do you think the cheque replacement document is, in order to allow those banks that do not want to adopt the new technology still to operate?
Secondly, given that 10% of all ATMs already currently have the facility to scan and accept cheques, what discussions are you having with the banks in order to encourage that further roll-out? So that as well as doing it on your mobile phone, you can just enter your cheque instantly at the ATM.

Andrea Leadsom:We are hoping and fully intending that all banks will be able to offer this cheque imaging facility. That is one of the reasons for the two years. Certainly, we are now on the cusp of innovation in banking and people’s ability to use smart ATMs. Just last week I was in Mumbai talking to big Indian banks that are doing great work with what they call e-lobbies, where you effectively have smart ATMs in a little house where you can go in and do pretty much everything without the need for a person to be there.
There is a lot of work and we are on the cusp of it. With the advances in the levels of switching, banks are seeing the importance of new customer innovation. Cheque imaging is just the start; I think there is a lot more to come. Your point about paying in cheques at ATMs is a very important innovation.

306 Andrew Griffiths: Finally, to Mr Hancock, in relation to pubco reform, I am delighted that, even though we have had four BIS reports and this has gone for many years and the previous Government failed to do anything to regulate pubcos, it is this Government who have brought this forward. Giving a statutory code and real powers for landlords to take up their grievances is fantastic.
My one concern relates to the parallel rent assessment, whereby anybody taking on a tenancy agreement would be provided with information about what else is available, including what that kind of tenancy agreement would cost if they went free of tie. The initial idea was that it would provide transparency and information. My concern is that if it were something that people could take to the adjudicator—under the legislation as written, they could do so from the moment they went to negotiations—and given that, as we heard this morning, up to 5,000 such rent discussions take place every year, the adjudicator might be completely bogged down and unable to take forward the kinds of claim that we want him to look at because he will be dealing with negotiation over rent, which is really a transparency and information matter. Will you have a look at that and ask your officials to consider the implications for the adjudicator’s workload?

Matthew Hancock:  The intention is that this is a transparency measure, with the adjudicator as a backstop, and that that is the norm.

307 Andy McDonald (Middlesbrough): May I turn your attention to the public sector exit payments in clause 140? What do you think the extent of the problem is, and where are the major problem areas? There is nothing in the Bill about time scales for recruitment provisions. Can you address the issue of people gaming the legislation and manipulating their stated date of return to the sector from which they came?

Andrea Leadsom:  The intention of the policy is to cover people who work in the public sector, leave with a redundancy payment—if they earn a significant amount; we have set it at £100,000 or more—and then return to a similar role. Sub-sectors will be defined, so if you were moving from the civil service to retrain as a teacher, you would not be in the same sub-sector, but if you moved to another non-departmental body, for example, you might. The purpose is that if you move to another job within a year, your redundancy payment will be clawed back, subject to a taper to take into account the fact that, if somebody is made redundant, they may spend a period of time out of work. That is the intention.
It has been a significant issue over the past few years. The intention is to ensure fairness to the taxpayer, so that we do not end up with a situation in which a local authority leader or chief executive leaves one local authority, taking a big redundancy payment, and then moves to a different county or district authority and starts again on another high salary. That is simply not fair to the taxpayer.

308 Andy McDonald: The Government’s website says that £2 billion was paid across the public sector in 2012-13. In the civil service, between 2010 and 2012, £600 million was spent on redundancy payments. I am trying to tease out whether any particular Department, whether the MOD or elsewhere, might be causing particular difficulties.
With NHS modernisation, the cost of redundancies from 2010 to March 2013 was £435 million. Those people have presumably been employed in places such as primary care trusts, been made redundant and then come back into the system. Is that not closing the stable door after the horse has bolted? Is it not clearing up a mess of the Government’s own making?

Andrea Leadsom:  As you rightly say, there is a wide spread of different parts of the public sector in which this situation has arisen. There are lots of examples of a situation in which somebody has left one job, taken redundancy and moved to another. I would not say that it is particularly focused in one area or another, but this is about fairness to the taxpayer, by ensuring that where somebody takes a similar enough job, the taxpayer gets that redundancy payment back. It is about fairness, rather than shutting the stable door, as you put it.

309 Andy McDonald: The Health Committee found that there has been 19,000 redundancies in the NHS, and 17% of those people had been rehired within a year. Is it not a concern to have such a high proportion in the NHS? What is the cause of that?

Andrea Leadsom:  Right across the public sector, there is a significant tendency for people to move out of one role and into another. As you will know, since 2010, there has been a determined effort to reduce costs in the public sector through our cost reduction plans to eliminate the deficit, so it is absolutely true to say that there have been redundancies. Of course, people who have worked in the public sector will often be attracted to finding another job in the public sector. As I said before, this is about fairness to the taxpayer and ensuring that the taxpayer is not paying out large sums in redundancies only to incur the cost of re-employing the same person in a similar role elsewhere.

310 Andy McDonald: We all applaud the drive to reduce costs, but does it not increase costs if you just dismiss somebody, or bring their employment to an end, and give them a significant payout only for them to come back into the same organisation with the benefit of that payout? Had that reorganisation not taken place, you could have avoided the payout.

Matthew Hancock:  You could say that that shows why these clauses should have been introduced earlier. Unfortunately, that did not happen under a Labour Government.

311 Mark Garnier: Ms Leadsom, I refer you back to something you said earlier. This is in the context of Sheryll Murray’s question about zero-hours contracts and the relative value of zero-hours contracts, as opposed to what some people refer to as traditional guaranteed-hours contracts. Do you genuinely think that there is any real difference in the worth of those contracts? Is one better written than the other, or do you think that, broadly speaking, they are just contracts of employment, with one being slightly different to the other?

Andrea Leadsom:  I think that they are just different contracts of employment. I have been involved with a charity that effectively recruited therapists on zero-hours contracts, which those people wanted because they have private clients in addition to the clients through the charity. The two contracts are different, and one is not necessarily better than the other. In the context of the question about Treasury revenues, my reply was about the desire to raise Exchequer revenues. Obviously, the more hours for which people are employed, the better it is in that sense. I would not say that there is any difference in the worth of the contracts, merely that they need to be flexible to meet the requirements of not only the employer but the employee.

312 Mark Garnier: That is a very important point on revenues to the Exchequer, and clearly we all want to resolve the deficit—we have to get that sorted out—but is not the aggregate number of hours worked in any economy constant, irrespective of whether they come through zero-hours contracts or through fixed-hours contracts? The economy needs x hours to be worked, and if some people are on zero-hours contracts and some people are on fixed-hours contracts, the aggregate will be the same. If you did not have the flexibility of part-time work or zero-hours work, you would have less fixed-hours work.

Andrea Leadsom:  Yes, I absolutely agree. My point is more that the Treasury’s interest is to see more people in work, on any form of hours, with the flexibility to meet the needs of not only employers but employees. Whether that is zero-hours, part-time or full-time work, it is a good thing. The Treasury’s motivation in all this is not to stipulate the terms on which people are employed, but to see more people employed and for more hours. That is my point about Exchequer revenues.

313 Mark Garnier: Just to be absolutely clear, a zero-hours contract versus a fixed-hours contract is neither better nor worse in either legal terms or in terms of what it means to the Exchequer?

Andrea Leadsom:  That is exactly right.

314 Toby Perkins: Minister, I want to raise the drafting of the pubs code legislation. We on this Committee will be asked to approve it without the actual code existing. The Bill provides for a code that will be put in front of us in the next year or so, but there is no mention of the enhanced code. We have been told that that is coming. Why was the decision taken to bring in the legislation in that way, so that the principle of the code will be established in this Bill, but the actual code will be a matter for secondary legislation?

Matthew Hancock:  That is often how legislation is introduced. Of course, the details of any secondary legislation will also be brought forward and we will work on them, talking to everyone about them. That is a pretty standard way of legislating.

315 Toby Perkins: That is interesting. I raise the matter because there are many people, in particular some among the Liberal Democrats, who might well say, “Well, once we have the code, what comes further down the line? We can keep changing the code so it looks more like what we want.” I wondered if you had made a specific decision to do it in that way, because one of the things that came across in numerous pieces of evidence was people in industry wanting some sort of certainty. I suggest to you that this would be another piece of temporary legislation. Actually, once the code is in place, future Governments might well decide to return to it and strengthen or weaken it, or whatever they like. I wondered if that was a matter of design by the Government, or is that something you think may happen afterwards?

Matthew Hancock:  No, it is not a matter of design in that way. What we are designing is how we put in place a better system for regulating the pub industry than has been in place hitherto.

316 Toby Perkins: Sure. We have been calling for a statutory code for some time so we certainly support the code, but I thought it was interesting to see whether that was a matter of design or just something that happened.

Matthew Hancock:  You say you have been calling for it for some time, but it has not actually happened and every time it has been looked into in the past the decision has been ducked, so it is good that it is happening now. We have got to get the balance right in terms of getting all the details right and we will do that in a measured way.

317 Chris White (Warwick and Leamington): We have heard a lot about zero-hours contracts, but I am interested to know views on people who are failing to pay the minimum wage. What enforcement action is taking place now and what has taken place in the past?

Matthew Hancock:  The amount of minimum wage non-payment that has been enforced against has almost doubled since 2003-04, when the figure was 2.6 million—off the top of my head. It is now 4.6 million, in the past year, so there is more enforcement happening. We have increased the budget for enforcement, despite the fact that we have had to take difficult decisions on spending elsewhere. Obviously, we have increased through secondary legislation the maximum penalty. What we are doing here is strengthening those penalties further, making sure that the measure will apply per worker rather than per notice. We have also introduced naming and shaming for the first time—naming people who do not pay. I think that that is having an impact on behaviour. We have been doing a whole series of things, strengthening not only the value of the minimum wage, which went up on the first of this month for the first time in real terms since the recession, but the enforcement of it. The Bill takes those things forward.

318 Sheila Gilmore (Edinburgh East): Does either Minister have a view on whether it would be appropriate to give all workers a copy of their terms and conditions within eight weeks of entry into employment?

Matthew Hancock:  Sorry?

Sheila Gilmore: What is your view on giving a right to all workers to get a written copy of their terms and conditions within eight weeks of entering into employment?

Matthew Hancock:  It is outwith the Bill. It is the first time that anyone has mentioned it to me.

Sheila Gilmore: I think it was mentioned in the written evidence from the CIPD, for example—but you have no view on that at the moment?

Nadine Dorries: Ms Gilmore, Members must adhere to what is within the scope of the Bill.

Sheila Gilmore: It is within the scope of the Bill, because it relates to people who would be regarded as workers in terms of having a zero-hours contract, but not as employees. That was the point I was trying to bring out.

Matthew Hancock:  Yes, but people who have zero-hours contracts are employees. That is the matter of fact.

319 Sheila Gilmore: Are they all employees?

Matthew Hancock:  A zero-hours employment contract is an employment contract.

320 Sheila Gilmore: With zero-hours contracts, would you consider adding a statutory right for an employee to request a contract that guarantees hours without suffering dismissal or detriment?

Matthew Hancock:  We have not put that into the Bill. The issues of what contract is on offer and how it is taken up are complicated, because that depends on the relationship between the employer and the employee. It is not something that is in the Bill.

321 Anne Marie Morris: Very quickly, because we do not have much time, may I ask you, Matthew, what you are doing on definition in the Bill? You have done a fantastic job of supporting micro-businesses, and the Government have done a huge amount in helping with regulatory issues and access to finance. One of the challenges has been that, because there has been no definition of a micro-business, it has been difficult to get those things right and it has been difficult for the Government to segment their offerings within the SME community, so I am pleased to see the definition proposed.
Can you confirm that you have considered in hindsight that a definition that does not follow the EU one might be more appropriate than the EU definition? The work that the all-party group did on that showed that in most countries the definition of a micro-business is one that has fewer than five employees. Do you intend to use the definition to segment better the offerings from Government to the parts of the SME community, rather than continue with the broad offerings we see now?

Matthew Hancock:  I am delighted that you are as enthusiastic as I am about the clause. It is important. It might sound technocratic to say that we have to have a legal definition of what a small business is and what a micro-business is, but it has a big impact on policy making and policy delivery in legislation. The SME definition of small and medium-sized businesses has been widely used for such things as lower levels of regulation or less burdensome regulation and to define areas that should be treated differently for smaller businesses. The problem is that a business with two employees is different from a business with 240 employees. Only having a definition of an SME means that if a regulator is required to take into account the impact of its regulations on SMEs, it can take into account the burden of regulation on a 249-person employer. What that company can cope with is vastly different from what a very small company can cope with.
Despite using it eight times in the past three minutes, I want to abolish the acronym “SME”. Instead, we should have micro, small and medium-sized businesses defined separately. That is what the Bill does. There is a handy EU definition, but I am sure that we in Britain have the ingenuity to write our own. Whether the definition of micro is five or 10 employees is a moot point. Proposing it at 10 brings it into line with many other jurisdictions and there are advantages to that.
The difference between an eight-person company and a four-person company is much, much smaller than the difference between a four-person company and a 204-person company. The distinction there does not really—I was about to say something I did not agree with. [Laughter.] There is only one minute to go. I had done so well. There are arguments in favour of both five and 10. On balance, I think there are stronger arguments for 10, but we will no doubt return to that point in Committee.

322 Oliver Colvile: Minister, will you confirm—I think I get it—that if someone is on a zero-hours contract, they still have employment rights?

Matthew Hancock:  If you are on a zero-hours contract, that is a contract of employment.

Nadine Dorries: That brings us to the end of the time allotted to oral evidence. On behalf of the Committee, I thank the witnesses. I remind Members that the deadline for amendments to be considered next Tuesday is at the rise of the House this afternoon.

Ordered, That further consideration be now adjourned. —(Mel Stride.)

Adjourned till Tuesday 21 October at five minutes to Nine o’clock.
Written evidence reported to the House
SB 31 R3
SB 32 Admiral Taverns
SB 33 British Private Equity & Venture Capital Association
SB 34 Punch Taverns plc
SB 35 The Quoted Companies Alliance
Letter from Mr George Mudie MP